PG&E Has a Plan to Exit Bankruptcy. Now It Needs to Convince Everyone Else That It Works.

Pacific Gas & Electric
(ticker: PCG) has filed a reorganization plan, and five banks say they are confident it can finance its exit from bankruptcy. Now it just needs to get a cast of hedge funds, regulators, and wildfire victims to cooperate.

That could be a tall order, at least under its current plan. A few provisions in the plan could receive pushback from investor groups that have gone up against the California electric utility (and its shareholders) earlier in the bankruptcy process. That matters because any plan will need to be approved by wildfire victims, shareholders, and regulators, if not bondholders as well.

Most importantly,
PG&E
’s plan puts a nearly $18 billion cap on compensation for wildfire victims and insurance claim holders. That sum will likely be considered insufficient by Californians who were affected by the catastrophic fires that killed more than 100 people and burned more than 200,000 acres in the past two years. The proposal would also pay the victims out of a trust, in effect preventing them from coming after the reorganized company for additional damages.

Wildfire victims received similar treatment in a draft reorganization plan filed by PG&E bondholders including Pimco and Elliott Management earlier this year. That proposal capped wildfire payments between $16 billion and $18.4 billion, and created a trust for those assets.

The similarities between the two groups’ plans end there. The bondholders’ plan diluted current shareholders’ ownership stake by roughly 90% and left the creditors owning most of the company, among other differences.

That bondholder plan was rejected by the court last month. And on the same day, Judge Dennis Montali decided to allow wildfire victims to pursue a jury trial against PG&E in state court. They will challenge a state agency’s finding that the utility didn’t cause the second-worst wildfire in California’s history. Notably, even that group includes hedge fund money. One of the largest owners of insurance claims is Baupost Group.

About 51% of PG&E’s shares are owned by hedge funds such as Abrams Capital Management and Knighthead Capital, which are the primary sources of backstop financing in the restructuring plan PG&E filed this week.

Under that plan, payments to wildfire victims would be financed with up to $14 billion of new equity. The format of that equity offering would vary depending on the implied valuation of the new stock, however.

That plan would be backed by a group of investors who agree to buy the shares—as long as the company doesn’t cause any catastrophic wildfires this year. In its filing, PG&E included letters from Abrams Capital Management and Knighthead Capital pledging to backstop $1.5 billion of financing, and said it would find investors to back the remaining $12.5 billion by Nov. 7.

Investors may not need to provide all $14 billion of the promised cash, however. For example, if the company issues more than $7 billion in debt, the additional debt would count toward some of that $14 billion total.

And in a couple of scenarios, the company would be able to sell some shares to the public or as part of a rights offering. The method they choose would depend on the implied price-to-earnings ratio, or P/E ratio, of the shares that will be sold.

There could be disagreements over who gets to vote on the deal as well. Before implementation, the plan will need to be approved by company shareholders and wildfire claimants. (The bankruptcy judge and the company’s top regulator, the California Public Utilities Commission or CPUC, need to approve any exit deal as well.)

PG&E says it will pay bondholders back in full, which would mean they don’t get to vote.

But the company wants to pay the accrued interest at a 2.6% interest rate, while the coupons on those $17.5 billion of bonds range from 3.3% to 6.4%, according to CreditSights. That lower rate would also apply to the $3.3 billion of revolving bank debt and $600 million of unsecured term loans that PG&E had going into bankruptcy, according to bankruptcy filings.

“We expect to see bondholders objecting to the plan,” the CreditSights analysts write. “While we do not expect that the debtors’ plan in its current form will glide through to confirmation unchanged, we think that its terms are an important baseline for future negotiations.”

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